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Tying up those loose ends

Purchasing a business

· law,business,purchase

I’m sitting in my favourite barber shop, ‘Barberchops’ sipping a delicious coffee made by Barry, waiting for an overdue haircut. Doing as I am want to do, I start thinking about all of the legal issues that Barberchops must have dealt with when setting up its successful business.

The first thing that comes to mind, is the original purchase of the business. I have helped several clients purchase new businesses and there are a multitude of legal issues that need be contemplated before making any offer to purchase.

Of utmost importance is to ensure that your offer to purchase contains all possible protection. Make sure that fundamental conditions (or keeping with the hairdresser theme - condition-ers) are satisfied before the purchase becomes unconditional. The purchase should be subject to:

  • the purchaser being satisfied that the business is commercially viable. This involves a due diligence process involving thoroughly investigating all aspects of the business for sale. The purchaser should look at the business's operations, financial performance, legal and tax compliance, customer contracts, intellectual property and other assets;
  • the negotiation of a satisfactory lease with the landlord (or negotiation of an assignment of lease);
  • ensuring that there are no legal proceedings pending against the business or the seller;
  • ensuring identification of the assets to be purchased and any assumed liabilities; and
  • other “escape clauses” covering finance, record inspections, obtaining necessary licences and rights or other transfers.

The negotiation of a new lease is fundamental. Almost every commercial lease requires the director or directors of the purchasing company to provide a personal guarantee. It is essential to be satisfied that the net outgoings of the business will be able to fund the lease. I am still surprised when individuals come to me saying that they never thought they would be caught by their personal guarantees. Some clients have even told me that they did not know what they were signing!

Other important considerations include making sure that you have the right insurances. My hairdresser told me that she had special insurance which specifically covered the unlikely event that she chopped a client's ear off. I think she was joking. In all seriousness, workers’ compensation, public liability and professional indemnity insurance all need to be carefully considered.

Licences and approvals are another important consideration. These can range from the normal – for example a liquor licence, to the obscure - approval to discharge trade waste, to play background music or to erect or maintain a sign. Make sure that there will be no issues obtaining or maintaining those licences or approvals, as in a worst-case scenario, they may prevent the operation of the business you are purchasing.

Finally, legal arrangements such as partnership agreements, director’s agreements and shareholders agreements should be set in place. Please do not Google a legal precedent for a shareholder’s agreement, the law in Afghanistan may very well differ from that in Australia. Invest in a good lawyer who will provide you with an agreement tailored to your specific needs.

Don’t make a mistake when you purchase a business.

some of the worst mistakes of my life have been haircuts

- Jim Morrison

Don’t be Jim Morrison.